Marketview: Precision Selloff

Selling accelerated in post-election trade this week as we continued the pattern of orderly selling with a slight bounce late in the week. The bounce was reportedly due to a constructive meeting at the White House between congressional leadership. Breadth finally achieved some serious oversold conditions. The odd thing is volatility has remained depressed through the duration of the selling pressure. This is part of the reason I referred to this correction as a bear raid last week. There is no feeling of fear, only additional supply. On paper, we should be bottoming out here, but the question on everybody’s mind is whether the organized nature of the selloff is due to a resilient investing public or a fundamental market sea change being met by complacency. The market has reached and exceeded my support level of 1360. We should rally from these levels, or there is something very sinister at play.

On the positive side, while $AAPL has served as the mascot for the bull market run, the real strength has come from home construction, and consumer discretionary stocks. Both home construction and consumer discretionary did very well this week relative to the overall market, indicating that the broad leadership is still intact. On the negative side we saw jobless claims go off the charts negative (partially due to Superstorm Sandy) and some economic contraction in Europe.

We did see the bottom carving trifecta of $XLP, $XLU, $XLV outperforming the market in a risk-off trade. The real punishment was dolled out to underperforming industrials, tech, and basic materials. Don’t be a bottom fisher or knife catcher. Wait for the market to become healthy again. If see a decent rally we will likely revisit and exceed the previous highs in the process. There will be plenty of plays in between the bottoming process and then. I am still bullish long-term and this is still a QE market but our indicators are keeping us neutral to short-term bearish at the moment (see chart below: blue line above zero is bullish, below is bearish). Last word: Financials are still outperforming.

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